Ishac Diwan

Foreign debt, crowding out and capital flight

Abstract The modern theory of international debt with potential repudiation is extended to the case of a small two sectors economy facing terms of trade uncertainty. My model explains the phenomenon of simultaneous foreign borrowing and investments at home and abroad. I show that foreign debt rationing is a necessary condition for such an occurrence, and that capital flight can accelerate when the world interest rate falls while the credit ceiling necessarily increases. Moreover, capital controls can potentially lead to increased flight.

Policy Selectivity Forgone: Debt and Donor Behaviour in Africa

A large literature has developed on the country and other factors that influence the effectiveness of aid and the development aid business more generally. Two major findings have emerged (World Bank, 1998). First, aid is more effective when the recipient country’s policy and institutional environment satisfies some minimal criteria. Second, aid and debt relief have not been particularly targeted to countries with adequate policies and institutions.1 In this chapter, we concentrate on understanding the dynamics behind the second finding. To do so, we analyse the donor and official creditor side of the aid process. Our specific hypothesis is that the growing debt of poor countries since the 1980s and its composition has affected the process of granting new loans and grants by donors and official creditors.

Linking trade and external debt strategies

Abstract Despite the productive inefficiencies generated by policies of export promotion and of import substitution, such development strategies can improve welfare when used in conjunction with a debt strategy. Export promotion can increase the availability of foreign finance, and import substitution can reduce debt service. When the latter strategy is optimal, partial debt forgiveness increases the creditor groups payoff. Import substitution is more profitable with a large inherited debt, high world interest rate, low terms of trade, and when creditors fail to reduce inherited debt.

Are buybacks back? Menu-driven debt reduction schemes with heterogeneous creditors

There is always some price that is low enough so that a debtor country gains by buying back some of its debts. Similarly, there is always some price that is high enough so that creditors gain by selling their debt claims. What is needed is a mechanism that allows trades to take place at some price within this range. One mechanism, the market buyback, has been called a boondoggle. However, market buybacks are too expensive from the debtors point of view and faced with a buyback bid, each creditor has incentives to hold onto its claim unless the bid is larger than the value of debt after the deal. Concerted debt-reduction agreements can overcome this type of coordination failure, but they may be difficult to reach in practice because of the heterogeneity of creditors. The authors argue that the menu approach to debt reduction retains the advantages but not the inconvenience of buybacks and concerted agreements. They introduce a model of bank asset pricing in the presence of tax incentives and deposit insurance. They then derive the equilibrium level of exit and new money for a distributionof creditors facing a given menu program. They show that the optimal menu includes some positive level of debt repurchase in almost all cases - challenging the argument that buybacks are undesirable. The authors conclude that the menu program dominates the standard buyback and new money approaches.

Crony Capitalism in Egypt

Abstract The paper studies the nature and extent of Egyptian “crony” capitalism by comparing the corporate performance and the stock market valuation of politically connected and unconnected firms, before and after the 2011 popular uprising that led to the end of President Mubarak rule. First, we identify politically connected firms and compare the corporate behavior of connected and unconnected large firms before 2011 in terms of their levels of debts, market share, and tax payment. Second, we conduct an event study around the events of 2011 and estimate the market valuation of political connections. Third, we attempt to decompose the extra value that the market attributes to political connections between a current profitability advantage, and future advantages that include higher growth opportunities and (implicit) bail-out guarantees.

Understanding Revolution in the Middle East: The Central Role of the Middle Class

The paper presents the outlines of a coherent, structural, long term account of the socio-economic and political evolution of the Arab republics that can explain both the persistence of autocracy until 2011, and the its eventual collapse, in a way that is empirically verifiable. I argue that the changing interests of the middle class would have to be a central aspect of a coherent story, on accounts of both distributional and modernization considerations, and that the ongoing transformation can be best understood in terms of their defection from the autocratic order to a new democratic order, which is still in formation. I then review what the evidence says in two central parts of the emerging narrative, for the case of Egypt: first, by looking directly at changes in opinion and asking whether these are consistent with the predictions of the theory. And second, by examining the corporate sector before and during the uprisings of 2011 in order to understand better the performance of “crony capitalism”, and to evaluate whether it may have affected the incentives of the middle class to defect.

Recent experience with commercial bank debt reduction: Has the “menu” outdone the market?

Abstract Debt reduction at market terms has been criticized as too expensive from the point of view of the debtor. The recent reduction agreements following the “menu approach” are partially concerted, but they also possess some elements of voluntariness. This raises two issues: (a) what is the conceptual justification for such financial arrangements/ and (b) based on recent evidence, to what extent have these arrangements reduced the cost of debt reduction? In a review of six recent menu-driven debt reduction agreements, we find that the debtors achieved a far better financial result than would have been feasible with simple market buybacks.

Understanding the Political Economy of the Arab Uprisings

For the millions of citizens in the Arab World who came together in 2010¨C2011 to discover their common yearning for dignity and liberty, the real revolutions only began after the wave of protests. Understanding the Political Economy of the Arab Uprisings reassess the interests, potential and constraints of various socio-political players and their importance in the building of a constructive environment for democratic progress in the Middle East. Initiated by the Cairo-based Economic Research Forum and edited by Ishac Diwan, this invaluable volume features contributions by Middle East academics across the world. They examine the reasons behind the uprisings, how democratic transitions transpire, the role of Arab capitalism in the crises, and how the experiences of other countries such as Indonesia, Turkey and Iran, can forecast where these uprisings may lead the Middle East in the years to come.

Heterogeneity in bank valuation of LDC debt: Evidence from the 1988 Brazilian debt-reduction program

Abstract Using data on bank choices in the 1988 Brazilian debt-reduction deal, we confirm predictable heterogeneity in bank valuation of Brazilian claims. In the presence of a functioning secondary market for LDC debt, the source of this heterogeneity is unclear. We introduce a model in which regulatory concerns influence bank choice. Bank choices in debt reduction programs are aimed at maximizing the magnitude of their transfer from regulatory agencies. As a result, bank choices reflect their characteristics, including financial strength and exposure to the debtor country. The directions of influence correspond to the predictions of our model.

Debunking Myth: Economic Values in the Arab World Through the Prism of Opinion Polls

ABSTRACT Using World Value Survey opinion poll data, we empirically characterize the economic values and norms held by individuals in the Arab world, in comparison to values held in the rest of the world. We find that, contrary to some common beliefs, there are many values that predispose citizens of Arab countries to be part of a market economy, including a high level of work ethics, comfort with competition and the work of markets, and a high level of economic motivation. Moreover, it is unlikely that the fear of income redistribution has taxed investment, as opinions among Arab citizens are similar to average global opinions. However, we also find a few values that are inimical to the workings of a market-led economy, and in particular, a low preference for thrift, low levels of acceptance of womens work outside home, and low trust in state institutions combined with a perception of high levels of corruption both in government and in business. We compare these preferences between citizens of Arab countries vs. citizens of Muslim-majority countries around the world, and of oil-exporting countries, and find that these groups exhibit related but distinct preference maps. We also ask whether these values are distributed differently among different types of individuals (with differing education, age, gender, and levels of religiosity) in the Arab world and in other countries around the world.